Modern Monetary Theory - Fraud 4

This is the fourth part of a critique of some of the thoughts expressed by Warren Mosler in his booklet "Seven Deadly Innocent Frauds of Economic Policy"

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Deadly Innocent Fraud #4: Social Security is broken. Fact: Federal Government Checks Don’t Bounce

The original point is clearly correct - all one need do in a fiat currency to pay any bill is simply print the value and hand it over. Our modern electronic accounting makes it even easier, incrementing accounts electronically. The significant issues with Social Security and Medicare relate to how they effect everything else that we do to save for our retirement, and to what happens next when the government does resort to simply crediting accounts to "pay" those bills.

The privatization argument #3 (p. 52) fails to account for reduced benefits expenditures for Social Security and Medicare (hereafter SS) when claiming the budget deficit will be that much higher. Although Mosler acknowledges in the following paragraph that "You later will collect a bit less in Social Security payments when you retire", his paragraph after than persists with the increased deficit story.

The notion of privatization as stated is something of a straw man in as much as it assumes that people will take the savings and put them in stocks. A policy of non-intervention would allow people to make their own choices on how to spend or save or invest that difference.

The point that SS payments are equivalent to bonds (p. 53) might be "operationally" true, in as much as the promised accounts are simply another expense on the federal books that are paid each year. But in this case there is not even the formalism of securities - receipts this year go to pay this year's expenses.

Compared to relatively low performing private investments, but with equivalent interest accounting for SS taxes, a recent study by the Urban Institute indicates that past performance of the SS system has exceeded that of such private investments - that is, the total benefits being paid out through that system have exceeded what people could obtain on the market (given their assumptions on rate of return). This alone gives reason to expect there are likely to be reductions in benefits as the population continues to mature, a projection that can be found in many sources, including the SS Administration itself. If a private annuity changed the terms of payment like SS has done already, and will likely continue to do, would be charged with fraud.

A further point against SS as a beneficial social institution is the way that demographics drive it to systematically transfer wealth from disproportionately short-lived black men to rich white women who are far more likely to collect SS payments for many years. More systematically, I found a 1994 Cato study (Cato Journal, V14 No 1) that outlines the differences in returns for various demographic groups

The interview with Steve Moore (p 54-5) is another straw man; both people fail to discuss how the key to improving our standard of living is to increase production. Increasing production allows our lives to materially improve even with constant money stocks, as prices persistently drop and make everything more affordable. Money prices mean nothing in this context - the more important measure is purchasing power.

The reason privatization is important in this context is that it allows people to decide for themselves the things of value that make increasing production equivalent to increasing living standards (it doesn't do any good to increase production in buggy whips when people prefer automobiles); this is the reason why personal investment decisions work better than political decisions (setting aside the fallacy that the government is "investing" much of these funds - they aren't going to expand consumer-driven production, but to pay off debts incurred in prior generations). These decisions are not simply abstractions of "better" that we could all agree with - they are the concrete priorities expressed through the dozens or hundreds of large and small purchases that we make every week on specific food products, articles of clothing, toys and gadgets, gifts, and entertainments. Another reason privatization is important is for reasons of incentives - taking control of people's futures out of their hands removes some of the incentives required to make choices in light of their possible future.

Mosler does acknowledge the importance of production (p. 57), but there's not much to say in this work as to why or how production increases - based on investment, driven by consumers, signaled by prices. His remark "that there pretty much isn’t anything in the way of real goods we can produce today that will be useful 50 years from now" should be questionable to anyone looking at modern buildings (my house and many others in my neighborhood were made in the 1920-40's, for example, and could easily last an equal number of additional years). Beyond property improvements, among other capital goods there are 707s and 727s made in the 1960's that are still flying today. A lot of machine tools have or will last well more than 50 years, as will large parts of power plants, and it seems reasonable to expect hand tools are more likely to be lost than wear out in that time. Sculpture and other art works, musical instruments, and irrigation canals. I purchased my bicycle in 1978, and don't expect it to fall apart 17 years from now.

Mosler seems to equate government spending with personal spending (p. 58), which conflation makes him confused about what the effect of savings really is. Savings is what allows for investment - if you consume everything you produce there is nothing left over for anything else. The investment adds time (and ideas and material and labor) to the production cycle and the result is doing more with less - it is not a zero sum game, so his financial accounting logic has limited usefulness in explaining what actually happens in the economy.

The broad challenge is in facing up to the fact of scarcity of the resources that go in to that production - time, material, labor - in all their varied characteristics and suitability for difference purposes. Our response to this scarcity depends on the object and our potential uses we might put it to; things we value more we will bid up in price, and forego (or economize) on other things as the trade-off. The things that make our lives comfortable and safe are not features of the natural world which just appear in final form. We have to make choices about which ones are of value, and not just in rough abstract terms but in hundreds of concrete decisions every single day, renouncing almost everything to have the few things we value most.

The great thing about living in society is that we reap the benefits of the disparate values of those around us. The fact that we all have different talents allows us to specialize in production to the benefit of others, and that we all prefer different things means when we choose to make exchanges that both parties come away in a better position.

But it appears that Mosler thinks all this can arise by changing bookkeeping entries in the government account.

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For more of this discussion, see the following posts concerning the other frauds

Introduction

1 - Government Spending

6 - Investment and savings

7 - Future effects

Wrap-up